Monday, March 03, 2008

Trading SPY and Stochastics in a Bear Market

If recent history is any indication, the next time the stochastic indicator hits an extreme oversold reading of less than 20, it will be time to buy the S&P 500. Since October the SPY has hit this level 6 times and made at least a three point gain in 5 of those trades. That amounts to an 83 percent win rate. Not bad.

Study the chart below and device an entry plan. Blue arrows show winning entries and the orange arrow points to the sole loss. Note that this chart is from from Friday's close. Today's stochastic reading is 32.68, which is still way to early for entry.

I will likely enter on an extremely low reading, and use a 1.5 point stop. My target will likely be three points. This is how I play longs during bear markets. I become more precise with my entries (something I've advocated against in the past) and take quick profits.